I have to admit that I didn’t care what team Lebron James decided to sign with last night – my teams (Phoenix and Detroit) weren’t in the running. However, I was correct in my assumption that he was going to sign with Miami. Here is the official announcement:

Of course I believe that signing with Miami was the best option from a basketball standpoint, but I also see the huge financial benefit as well.

Florida is a state that does not charge income tax. This is one of the reasons that many wealthy people choose to retire there. Yesterday the Tax Prof Blog wrote about Lebron’s state tax payments on a 5-year, $96 million contract:

$12.34m: New York Knicks

$10.32m: New Jersey Nets

$5.69m: Cleveland Cavaliers

$2.85m: Chicago Bulls

$0.0m: Miami Heat

Keep in mind that many states (and some cities) charge athletes when they play an away game in their state/city. So, this means that when Lebron plays a game in Madison Square Garden, he will have to pay New York city and state taxes on his single game pay. So he will pay some state taxes.

However, he will not have to pay state taxes on any of his home games. Also, since his endorsements will certainly pay more than his basketball contract, he stands to save another $10 – $20 million in state taxes over the next five years (as compared to playing in New York)!

This should add to the many warnings that economists have given over the years about raising taxes on the wealthy to increase revenue. As we can see in this Forbes article, many of the wealthy residents of New Jersey (my wonderful home state) left the Garden State after NJ levied a tax on all those making more than $500k per year.

According to the article:

The loss in wealth in New Jersey coincides with a notable state tax hike. In 2004 New Jersey was one of the first states to adopt a “millionaires” tax, imposing an 8.97% rate on income over a half-million dollars. The major change in New Jersey wealth came from large reductions of immigration to New Jersey by wealthy households from foreign countries, New York state and Pennsylvania. Also the number of affluent and wealthy households who left the state rose while the number of less wealthy households who left dropped.

Between 2004 and 2008, New Jersey saw a $70 BILLION net outflow in wealth!!! In the 5 years prior to this “millionaires” tax, we saw a $98 Billion inflow. In 2009, as the article mentions, things got much worse:

In June 2009 New Jersey Gov. Jon Corzine pushed through a one-year tax hike for the rich that included a 10.25% rate on incomes over $500,000, and a 10.75% rate for incomes over $1 million. That gave New Jersey the second highest state income tax rate in the nation, until Oregon adopted an 11% rate, pushing New Jersey back to third. In November Corzine lost his bid for re-election to Republican Chris Christie who ran on a promise of income tax relief.

Not only do we lose the actual wealth of these citizens, but we also lose their potential wealth creation. These are the small business owners and entrepreneurs who do a large part of the hiring and job creation in this country. They are taking their businesses and jobs elsewhere and the state loses out.

High state taxes is a surefire way to stunt economic growth. And New Jersey is not alone:

New Jersey wasn’t alone in raising rates last year. New York increased its top rate to 8.97% from 6.85%, prompting Forbes 400 member B. Thomas Golisano to change his official residence from high-tax New York to no-income-tax Florida. He told Forbes: “I’m not bailing out on the state. If anything New York has bailed out on us.”

As we can see Lebron James is not the first wealthy person to move to Florida, and he certainly will not be the last:

Not surprisingly, the wealthy leaving New Jersey tend to be older and many head to Florida, which has no state income or estate tax. From 2004 through 2008 Florida was the destination for 17% of the departed households and 20% of the departed wealth.

The point of this is not to say that the wealthy should never pay taxes. However, when you call on one small group of people to subsidize the majority, you are going to see a mass exodus of wealth as was seen in New Jersey.

When making any type of economic decision (even in our personal finances), we need to consider how our actions will affect everything – not just our desired outcome. To NJ legislators this looked simple – the state needed money, rich people have more to give, so make them pay higher taxes – however, they did not consider the full effect.

Findings from the Boston College report show that about 302,780 households left New Jersey between 2004 and 2008, only slightly lower than the 323,350 households that moved into the state. However, the average net worth of the departing households was about 70 percent higher, at $618,330.

Those who left were also more likely to be older and more educated, with jobs as entrepreneurs or in the finance and professional industries, the study found. Those replacing them tended to hold management or support jobs in the manufacturing industry.

So, it should now be clear that when taxes on the wealthy go up, they leave! And they take jobs and businesses with them.

I guess that was just another reason why Lebron choose the Heat over the Knicks or Nets (of course Wade and Bosh might have had something to do with it )!

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Well, so far it doesn’t seem that Miami was the perfect choice. Yeah, they were close to win the championship but history only remembers the winners! I hope he will get there in the end, he deserves it!

Hey Khaleef, Honestly I am not sure why politicians don’t understand this simple principle. It has been proven time and time again, that when you raise taxes to a level that is deemed to be unreasonable, people, especially wealthy people will vote with their feet. When you look at the amount of income tax to the state (not including federal) Lebron would have had to pay in New York vs Florida it is astounding. Sure Lebron can afford it, but I don’t care how much money you make, 12 million dollars is a lot of money to give up just to live in a certain area.

Look at all of the revenue that Florida is going to gain by having Lebron live there. The parties, the cars, the huge houses. Why is it that some of the few states that are doing well right now, have some of the lowest income tax rates? Maybe there is a lesson to be learned there.

Interesting post. Sports is a business. Although LeBron looked like a fool making his decision by taking his talents to South Beach, nice to see it made financial sense. He’s not a total idiot. Great point about taxing the super rich. Never saw the negative side effect of losing their wealth potential and jobs.

I think that soon this will happen on a much larger scale. Everyone thinks that the solution to our financial problems is to tax the rich. However, they are the ones who can easily pick up and go to another country!